Wall Street groups pan SEC's asset-backed securities draft plan

Sarah N. Lynch

4 Min Read

WASHINGTON (Reuters) - Two major Wall Street trade groups have criticized a plan floated last month by U.S. regulators to force issuers to disclose more sensitive loan-level data to investors, saying it could make companies more vulnerable to lawsuits.

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

In a joint letter to the U.S. Securities and Exchange Commission late Friday, the two groups asked the regulator to scrap its asset-backed securities (ABS) draft plan and start fresh.

“We ... urge the commission to re-propose the ABS releases, including the portion relating to asset-level disclosure,” wrote the Securities Industry and Financial Markets Association and the Financial Services Roundtable.

“Any such re-proposal should provide definitive, coordinated federal guidance as to whether an issuer’s compliance with the commission’s requirements fully satisfies the other federal laws that may be implicated by the disclosure of such asset-level information.”

The SEC has been considering major reforms to the asset-backed securities market for more than three years, after investors suffered losses on soured mortgages during the 2007-2009 financial crisis.

Asset-backed securities, comprised of bundled loans such as mortgages, were at the center of the crisis.

Many investors who bought them were unaware that the subprime loans underlying the securities were often made to people who could not afford to buy homes. Once the floating interest rates on those subprime loans spiked to higher levels, many homeowners defaulted and were forced into foreclosure.

The SEC is trying to adopt a new rule set for the asset-backed securities market to prevent similar problems from happening again.

A pillar of the proposed reforms is a measure that would require issuers of ABS to better inform investors about the risks by disclosing loan-level details, such as credit scores and geographic locations of borrowers.

That requirement for more disclosure has proven highly controversial, with many on Wall Street urging the SEC to proceed with caution or else banks and others could risk disclosing too much information and violating federal privacy laws.

The SEC was poised earlier this year to adopt the rule, but in late February, it canceled a public vote on the measure and re-issued it for comment alongside a new 19-page memo that lays out an alternative disclosure approach that the agency said aims to balance the need for investor protection and privacy.

The SEC’s tweaked plan calls for issuers to make asset-level data available to investors on their websites in a less public fashion.

That is a key difference from the SEC’s original plan which called for requiring all issuers to disclose the data in public financial filings with the SEC.

But SIFMA and the FSR said the SEC’s proposed changes are still not enough to protect issuers from lawsuits. If investors believe the disclosures on the websites are inadequate, they said, then investors could resort to suing the issuers for failing to disclose “material” information.

“This puts issuers in an untenable position,” they wrote. “The more carefully an issuer protects customer data by restricting access to its website, the more risk it bears of an investor suit for failing to disclose all material information.”